Financial institutions report multibillion-dollar effects of post-crisis costs
Morgan Stanley and Deutsche Bank have become the latest major financial institutions to declare that their earnings have been hit hard by litigation costs with Morgan Stanley in January reporting a fourth quarter 78% drop in net income to $192m, compared to $890m in its third quarter, due to legal costs and weak fixed income trading.
Revenue for the period rose from $7bn to $7.8bn since last year but pre-tax legal costs of $1.2bn meant that earnings for the quarter were almost wiped out, the FT reported in January.
In its report, the US investment bank declared that ‘the current quarter includes $1.2bn of additions to legal reserves for mortgage-related matters, specifically litigation and investigations related to residential mortgage-backed securities and the credit crisis’.
Chairman and chief executive James Gorman said: ‘Our fourth quarter results demonstrated the consistency embedded in our business model, as revenues increased year-over-year in all three of our business segments. Importantly, we are continuing to address many of the legal issues from the financial crisis.’
Meanwhile, Frankfurt-headquartered Deutsche Bank announced it had suffered a pre-tax loss of €1.2bn alongside a 16% drop in group revenue to €6.6bn in its quarterly results compared to the year before, partly attributing its performance to full-year litigation expenses of €2.5bn ‘as the bank put many major legacy issues behind it’.
In January, it announced litigation expenses amounting to €528m for the fourth quarter alone.
The bank – Germany’s largest lender – has been mired in controversy of late, having agreed to settle its mortgage-backed securities litigation with the Federal Housing Finance Agency (FHFA) as conservator for Fannie Mae and Freddie Mac with a payout of €1.4bn in mid-December. Deutsche Bank was one of 17 financial institutions the FHFA made claims against in relation to residential mortgage-backed securities.
The announcements follow October’s declaration from J.P. Morgan of a $380m third quarter loss after the investment bank set aside $9.2bn to cover its legal costs, its first quarterly loss in eight years. Chairman and chief executive Jamie Dimon claimed that its ‘strong underlying performance’ was ‘marred by large legal expense’.
Those results follow a sustained period of turbulence for the New York-based bank including litigation and government investigations into a wide range of issues such as the $6bn losses from its derivatives trader Bruno Iksil, more widely known as the ‘London Whale’, along with sales of mortgage securities, commodities trading and credit card debt collections. In January the bank agreed to pay $1.7bn (£1bn) to victims of the Madoff fraud in a settlement with US prosecutors.